Whether you include Social Security or not in your Retirement plan, it is something that impacts all of us. If you’re currently earning an income that is subject to payroll tax, you’re currently paying into the trust for Social Security. Or you may be 10 years out from retirement, and are curious when the best time to turn on your benefit will be. Approximately 65 million1 Americans rely on our Social Security program.
Why Was Social Security Created?
Social Security developed out of a need for economic security. What happens upon unemployment, death, old age? Thus, Social Security in American was born.
The history of our Social Security program is quite interesting, and the future of this insurance program has instilled some fear in many Americans. Let’s take a deeper dive into the in’s and out’s of the program, and wrap things up with what we can expect to see in the years to come.
The Social Security Act was signed into law in 19352, and created the social retirement system that would pay benefits to workers age 65 an ongoing income after retirement. Benefits were (and still are) ultimately determined based on payroll tax paid into the fund for a given individual’s working life.
Social Security Numbers began to be issued in 1936 as a way to register workers. Their working credits would then be tracked through their social security number. Payroll taxes began to be collected in 1937, where these revenues were placed into a special trust fund. Monthly payments officially began in 1940.
In 1950, the first major amendments were made, such as increasing benefits for a cost of living adjustment (COLA). By 1972, an amendment was made for an early retiree benefit at age 62. It wasn’t until the 1977 amendment that a shortage in funding was addressed. Mainly caused by a poor economy at the time, and the baby boom. The amendments increased the payroll tax, increased the wage base, and adjusted COLA rules. These new provisions estimated the social security benefits would last another 50 years.
As it stands today, your eligibility to receive Social Security benefits depends on your credits earned throughout your working years.
The amount of the benefit you’ll receive is determined by your credit, reported wages during your working years, and the age you elect to receive your benefits. It is intended to turn on your benefits at your Full Retirement Age (FRA). FRA ranges from 65 to 67 and is determined based on the year you were born.
You may elect to turn on your benefits as early as 62, this is called the Early Eligibility Age, but will result in a reduced monthly benefit.
On the flip side, you can delay Social Security until 70 which will result in a larger monthly benefit from that at which you would have received at FRA.
Deciding when to take Social Security is a big decision for eligible individuals, and often comes down to personal choice and Social Security Optimization.
Since the original 1935 Act was signed into law, a few changes have been made.
- In 1939, amendments were made to provide benefits for spouses of covered workers as well as a benefit paid to a spouse for the premature death of a covered worker
- An increase was made in 1977 to the payroll tax, moving from 6.45% to 7.65% (yes, this means this tax has not increased in 43 years!)
- In 1983, new legislation was enacted to gradually increase the Full Retirement Age from 65 to 67 over a 22 year period.
Many are fearful that Social Security will run out. Currently, the trust is expected to run out of funds in 2034. This leads many Americans to be fearful of what that means for their retirement income. Making it tempting to claim social security benefits early to claim what they believe they are owed.
Bottom line, Social Security is an incredibly important social system offered by our government that millions of Americans rely on. Because of that, the program is not going to simply vanish. At best, we can expect some changes in Full Retirement Ages, Payroll tax or the amount of benefits received. For example, benefits may need to be reduced by 20% if no changes are made. And while a reduction in benefits would be hard to stomach, at least we can still expect something. Keep in mind, as this isn’t a pressing or immediate demise, we likely won’t see the Government take action on any change for quite a few years to come.
Keep in mind, Social Security was never meant to be the sole source of income for retirees. It’s important to plan and save for this stage of your life.
Have you thought about how you’re going to replace your income in retirement?
If you have questions or would like to start that conversation, don’t hesitate to reach out.
Who is Carolyn?
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”
Carolyn Rowland is in the Milwaukee WI, area.